Legally-aided owners compromising dispute with mortgagee bank – Bank releasing mortgages on receipt of amount agreed under terms of settlement – Whether land so released subject to charge in favour of Legal Aid Board
Six members of the Morgan family, including M, D and C (the owners), traded as an agricultural partnership on a farm in Gloucestershire that consisted of a 33 acre parcel owned by M and a 73 acre parcel owned by all three owners. In October 1989 the owners charged the two parcels in favour of Barclays Bank plc (Barclays) as security for the repayment of all monies owed to the bank by the partnership. In July 1991 the owners purported to grant annual tenancies of each parcel to a family-owned company (the company).
In August 1991 Barclays instituted proceedings against the partnership for £818,266 then outstanding. The partnership counterclaimed, alleging breach of contract and misrepresentation. In May 1992 the company sought a declaration that the tenancies were binding on Barclays. In August 1993 both sets of proceedings were disposed of by the making of consent orders whereby Barclays agreed to receive £230,000 in final settlement of its claims and undertook, inter alia, to release the parcels from the charges as soon as £200,000 was paid. The orders further provided that each party was to bear its own costs, but there was to be legal aid taxation of the costs of each member of the partnership.
On the same day, the owners transferred the parcels to the company for £230,000, which was raised by charging the parcels in favour of another bank. The charges in favour of Barclays were discharged at the same time.
The Legal Aid Board (the board), having paid in excess of £75,600 in legal costs, claimed to be entitled to a corresponding charge over the parcels by virtue of section 16(6) and/or 16(7) of the Legal Aid Act 1988. This was disputed by the owners, who had given covenants for title in favour of the company. The issue came before the High Court, where the board accepted that no charge could have been asserted if the proceedings had gone to judgment, since, on the authority of Hanlon v Law Society [1981] AC 124, the parcels were not property that had been “recovered or preserved for [the legally-aided person] in the proceedings” within the meaning of section 16(6)>. In Hanlon, such property was held to be limited to property the ownership or transfer of which had been in issue in the relevant proceedings. The board contended, however, that the ruling in Hanlon did not apply in the present case as it was governed by section 16(7), which declared that the charge included “the rights of a person under any compromise or settlement arrived at to avoid the proceedings or bring them to an end”.
Held: No charge had arisen in favour of the board.
1. The owners did not dispute that property which had been released from an encumbrance was property which had been “recovered” for the purpose of both subsections; see Jones v Frost (1872) LR 7 Ch App 773, ruling upon the same words as used in the Solicitors Act 1860. However, the relevant words in subsection (7) were governed by the words “for the purposes of sub-section (6)”. While it would be appropriate to extend subsection (7) to property which had been substituted, under the terms of the dispute, for property falling with the Hanlon limitation, no good reason had been advanced for extending the charge to assets which, though included in the overall settlement, were no more than incidental to the issues raised in the relevant proceedings.
2. The issues compromised in the present case were the amount owed to Barclays and the status of the tenancies granted to the company. The release of the parcels from the mortgages was no more than an inevitable by-product of the settlement. That position was not altered by the fact that such release was expressly agreed to under the terms of the consent order. No authority to the contrary could be found in Van Hoorn v The Law Society [1985] QB 106, which was not only distinguishable on the facts but also difficult to reconcile with the reasoning of the Court of Appeal in Curling v The Law Society [1985] 1 WLR 470, Parkes v Legal Aid Board [1997] 1 WLR 1547, and McKay v Legal Aid Board (The Times, 7 March 1997).
3. The court also accepted the owners’ alternative submission that the parcels were not recovered for them, but for the non-legally aided company. It was no answer to say that there was a notional moment (scintilla temporis) between the release of the mortgages and the transfer to the company: see Abbey National Building Society v Cann [1991] 1 AC 56. Different considerations might have arisen if the owners had sold the land to the company at an undervalue.
Jane Collier (instructed by the solicitor to the Legal Aid Board) appeared on behalf of the respondent; Stephen Jourdan (instructed by Burges Salmon, of Bristol) appeared on behalf of the claimants and others.
